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Showing the Private Military Contracting Sector the Money

How fast has spending on private military contracting grown? A new report states that in FY 1990 spending was $49 billion. In FY 2010 it was $161 billion, or just over 40 percent of all contract spending.
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Imagine a real life version of the Jerry Maguire movie. In this reality, the private military contracting community is played by Cuba Gooding and the Pentagon is played by Tom Cruise. As Cuba dances around the kitchen he shouts, increasingly loudly, "Show me the MONEY." What does Tom do? Why, he delivers the money, of course.

Okay, a little over the top perhaps; after all, we know the Pentagon can't dance. Still this scenario nicely encapsulates the finding of a recent report by the Center for Strategic and International Studies.

The report, Defense Contract Trends: U.S. Department of Defense Contract Spending and the Supporting Industrial Base, released May 6, confirms why so many private military and security contracting companies (PMSC) are out lusting after, oops, I mean competing for, federal contracts. Because that, as bank robber Willy Sutton famously said, is where the money is.

Remember that PMSC firms, unlike the military-industrial complex of the past, are generally providing services, not hardware. Yes, there are exceptions, of course but they are small scale; they are not building fighter jets or aircraft carriers.

And providing services will definitely make a CEO smile. The report notes at the outset, "In DoD contracting overall, services grew at a much faster pace in the past 20 years than did products and R&D, and were it not for combat operations in Iraq and Afghanistan would possibly have continued to receive the lion's share of DoD contract awards."

How fast did spending on contracting grow? The report found that between 2001 and 2010, dollars obligated by the DOD to contract awards more than doubled, and contract spending far outpaced growth in other DOD outlays.

Yes, but how much is that in actual dollars? The report says that in FY 1990 it was $49 billion. In FY 2010 it was $161 billion, or just over 40 percent of all contract spending -- the other two categories being products and R&D.

While people still debate whether military outsourcing is more efficient and effective than keeping it in-house, the report makes it clear that if the goal is to allow private sector companies to make huge profits it is unquestionably a success:

Drawing down military and civilian personnel after the Cold War necessitated an increase in outsourcing to continue providing many services, while spending on products decreased with the numbers of active-duty military. The relative shares of product and services spending converged in 1998 and 1999, with the former decreasing and the latter increasing. After this point, products edged up over services, and the gap widened with the initiation of Operation Iraqi Freedom (OIF) in 2003. The relative shares of services and products appeared to begin converging again after 2008, as absolute spending levels declined sharply for products while spending on services remained relatively stable.

The period covered in the report was from 1990 to 2010. As one might expect, given the wars in Afghanistan and Iraq, the Army and "other DoD" (primarily DLA) shares of total contracting grew while the Navy and Air Force shares declined. More recently, with U.S. forces set to withdraw from Iraq, the Army's contract spending started to decrease in 2008 while the Navy's spending also shrunk and continued its long decline after a short period of stagnation. The share of Air Force contract spending in the last few years declined to the lowest of all DOD components.

Things were particularly sweet for Army contractors; think KBR LOGCAP awards for example. According to the report:

Army contract spending has skyrocketed over the past decade. During the 1990s, the Army accounted for only 23 to 25 percent of total DOD contract spending. Beginning in FY 2002, this share started to grow rapidly, reaching 40 percent of total DOD contract spending by 2008. Growth in Army contract spending averaged over 11.5 percent per year since 1999. This rapid growth is almost entirely attributable to Army operations in Afghanistan and Iraq.

From the viewpoint of getting the best bang for the buck the report actually had something positive to say about the state of competition in the Pentagon.

Overall, the majority of DOD contract dollars were awarded on an increasingly competitive basis towards the end of the period analyzed, and dollars awarded competitively rose faster than those awarded without competition. The share of contract dollars awarded using fixed price contracts also grew, at a faster rate than cost-based contract awards. Up through 2009, there was a disturbing and sudden rise in "combination" contracts, which obfuscated the total distribution of cost and price-based contracts, but contract spending allocated to this category seems to have all but disappeared in 2010.

The report noted important trends regarding contract competition: The first is a decrease since 2008 in the number of unlabeled contracts, which indicates that more care is taken in entering data on competitiveness. The second is an increase in fixed-price contracting that is faster than cost-based contracting, including time and materials, which is in line with the 2009 Presidential Memo calling for more use of fixed-price contracting across government.

Of course, it is the Pentagon so it can't all be sweetness and light. Thus, "In another trend viewed with concern in light of recent efficiency-promoting directives within DOD, the spending on indefinite delivery vehicles rose sharply in the past several years while definitive contracts and purchase orders stagnated and even declined in 2010."

If they do, then they are underestimating the total value of service contracts due to categorization issues.

The Top 20 DOD Contractors for Services in 2009 were:

(Contract value in 2010 in millions of dollars)

  1. Lockheed Martin 7,040
  2. Northrop Grumman 6,050
  3. KBR 4,660
  4. L3 Communications 3,710
  5. Humana 3,460
  6. General Dynamics 3,370
  7. Raytheon 3,130
  8. Health Net 2,860
  9. SAIC 2,840
  10. Computer Sciences Corp. 2,800
  11. TriWest Healthcare 2,700
  12. Boeing 2,650
  13. BAE Systems 2,120
  14. URS 1,810
  15. ITT 1,670
  16. Booz Allen Hamilton 1,540
  17. Hensel Phelps 1,420
  18. Hewlett-Packard 1,410
  19. CACI 1,390
  20. Bechtel 1,270

Total for Top 57,890

Total for Services 162,460

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